Target pricing is the process of estimating a competitive price in the marketplace and applying a firm’s standard profit margin to that price in order to arrive at the maximum cost that a new product can have. A design team then tries to create a product with the requisite features within the pre-set cost constraint.

Target Costing | Managerial Accounting

Example of target pricing

If a business wants to sell desk chairs and the going rate is $200 per chair, it might set its selling price per chair at $250 and position its desk chairs as a high-end product. For each chair sold, they will make $50 in profit if they decide to keep a 20% profit margin. The company must therefore be able to manufacture the chair for $150 or less if it wants to make $50 per chair and sell them for $200. They won’t make their desired profit if the manufacturing cost exceeds $150, so they may decide against selling desk chairs.

What is target pricing?

Businesses determine a product’s selling price using the target pricing method, which bases its determination on current market prices. The first step in setting a competitive price for a product is for a company to conduct market research and look at what similar products are selling for. The amount of profit a company wants to make from its products after determining the price of those products is known as the profit margin.

The business must determine whether the cost of manufacturing or acquiring the product is within the available budget after establishing a profit margin. The project is abandoned by the company if the product can’t be finished within the budget. This strategy enables a company to sell its product at a price that is consistent with market demand, ensuring that it will make a reasonable profit.

Target pricing is most frequently used by businesses with high capital expenditures like automakers because it is not directly related to product demand as long as they sell the entire volume of stock.

What are the advantages of target pricing?

A few benefits of using the target pricing method are listed below:

What are the disadvantages of target pricing?

Here is a list of some disadvantages of target pricing:

What are other methods of pricing?

Other techniques for setting product prices are as follows:

FAQ

What is example of target price?

Steps for Target Pricing
  1. Determine the competitive price in the market.
  2. Determine the profit margin expected from the product.
  3. Calculate the cost by using 1 & 2 i. e. Expected Price-Profit.

How do you target price?

Disadvantages of Target Pricing
  • Target pricing depends on accurately predicting the product’s final selling price.
  • Estimating a price too low and then setting extremely strict cost constraints as a result may put an unreasonable amount of pressure on the production department.

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